Bookkeeping agencies

Case S2A: successful, non-threatened

Present situation. The firm was a bookkeeping agency offering bookkeeping and auditing services, payroll computation, account paying services, and consulting in e.g.

business transitions, budgeting, and changes of legal form. Customers were local SMEs in many industry sectors. The firm was a member of the group of bookkeeping agencies which provided some professional services to its members. One important cooperation partner was a software company, and the firm had built a network of specialists which could provide their services to the firm’s customers in legal, insurance, marketing and other special areas. According to the entrepreneur, the firm’s competitive advantage boiled down to three factors: high quality, personal service, and technical know-how. On the other hand, pricing was a competitive disadvantage.

However, it was the firm’s conscious decision not to compete with prices so as not to get the reputation of being a cheap bookkeeping agency. The firm had adopted a customer-driven approach to business: “the firm’s success was based on the success of its customers: the better the clients’ performance, the better the firm’s performance”, as the entrepreneur put it.

Life cycle. The firm was founded at the end of the 1970s. Previously the entrepreneur had worked as financial manager in an SME which went into liquidation. He had work experience in similar tasks in SMEs in many industry sectors. His parents had also been entrepreneurs. Moreover, there had also been two other founders whose prime role was acting as financiers and mentors without participating in the everyday business. The entrepreneur had met them by accident when they had planned to set up a new bookkeeping agency in the same location. Ten years later they sold their shares in the firm to the entrepreneur, who thereafter was sole owner.

From the very beginning, the firm had aimed to stand out from its competitors by providing extended service and consultation to clients. It meant that clients and their problems were approached and treated holistically. The firm’s way of doing business had changed over time due to the development of the environment. Networks had been developed at the very beginning in the firm’s history and they had been modified over the years.

The firm had grown slightly, and the entrepreneur’s aim had been to keep the firm in such a size that he can manage by himself. The financial state had always been good. The firm had always tried to be in the frontline of technical development and to serve clients in the best possible way. The firm had actively participated in research and development projects carried out in the group. Also, in hiring staff the entrepreneur had always sought to match employees’ personalities and their positions,

since this enables people to give their best. The firm had extensively invested in employees’ professional education. Interestingly, except for the very first years, there had been no need for marketing. The biggest changes in procedures had happened along with the development of information technology. Changes in legislation had forced some changes in the calculation systems, and caused some extra work for the firm.

The main factors contributing to the firm’s success can be summarized as follows:

• the entrepreneur’s professional education, family background, and varied work experience

• the mentoring given by the two other founders of the firm

• a full-service bookkeeping agency as a way to stand out from competitors

• the firm’s research and development orientedness, and staying in the frontline of technical development

• personal service with deep and multifaceted investigation of clients and their problems

• a versatile customer structure

• a good reputation (no need for marketing)

• good business sense: taking on the most profitable and long-term jobs, and leaving less profitable and occasional jobs for others

• high-quality work and efficient personnel, and investing in personnel training

• the philosophy of “the right persons in the right positions” led to flexibility in work behavior

• active networking with the group, experts and specia lists, and the software firm

• adaptation over time to the changes in customer needs and technical development

• a small amount of debt, and an efficient follow-up of costs

Case S2B: successful, threatened

Present situation. The firm was a bookkeeping agency offering bookkeeping and auditing services. Customers were SMEs only, and mainly in the service sectors. The firm was an authorized bookkeeping agency, and the main cooperation partner was the Union of Bookkeeping Agencies. Other important cooperation partners were banks and insurance companies, and there was a two -way cooperation with them. The firm provided on-line information on the client’s financial state throughout the year, and this service marked out the firm from its competitors. Prices were higher than those of most competitors, and this caused a competitive disadvantage for the firm. The firm was dependent on the general economic trends which affected prices in the field.

Life cycle. The firm was founded at the beginning of the 1980s by two entrepreneurs.

After the first months of operation, one left the firm because of incompatibility between them. The remaining entrepreneur had a professional education and experience in similar tasks in both large and small firms. At the time of founding, the entrepreneur had seen that existing bookkeeping agencies could not provide the service that their customers really needed.

The firm had been active in research and development, e.g. by participating in projects aiming at quality development and improved customer service. The

entrepreneur had held several positions of trust in the field, and been involved in many networks, for instance, as an inspector in the Union of Bookkeeping Agencies. In this position she had inspected the operation of other bookkeeping agencies and had had a good opportunity to learn from others. There was constant demand for services, due to legal requirements affecting SMEs. However, work had been rationalized much over the years, and had become more interpretative and consultative.

At the time of the interview, the entrepreneur considered that the firm was the right size: on the one hand, it was manageable by one person, and on the other hand, it allowed the entrepreneur some freedom. In addition, though the turnover of clients had been rising, new technology had reduced the need for a human workforce. Therefore, there was a continuous need to find new customers to maintain the same level of turnover. However, as the entrepreneur said: “bookkeeping agencies are really bad at marketing” and continued: “our existing clients do it for the firm”. Another weakness of the firm had been the lack of financial follow-up and poor profitability: “a shoemaker’s children have no shoes”, as the entrepreneur said, quoting a Finnish proverb.

The firm had always tried to be in the frontline of technological development.

Computers and software were the biggest investments. They had been financed using bank loans, and the entrepreneur had used her personal property as a security for debts.

Moreover, the firm had invested in the staff’s professional education, which had been necessary because of changes in legislation.

The firm faced big credit losses in the mid-1990s due to the bankruptcies of the biggest customers, who could not manage their foreign currency credits after the Finnish mark was devalued at the beginning of the decade. The entrepreneur said that the firm had suffered all the time from an unfavourable customer structure, i.e. there had always been a few big clients, and this had caused a threat to the firm. At the same time, the bookkeeper in charge had left the firm taking her clients with her, and founded a new bookkeeping agency. The entrepreneur regarded this as a typical threat to any bookkeeping agency.

In addition, as a consequence of the general economic recession, new competitors had come into the field because of the bankruptcies of other bookkeeping agencies. Bankruptcies generated a number of unemployed professionals who then set up new bookkeeping agencies. At the same time, despite the fact that big firms outsourced their bookkeeping activities, which increased the demand for bookkeeping services, demand in general was decreasing and so competition increased. There had been pressures for lower prices because new firms usually competed with cheaper prices. As a solution to the difficult situation, the entrepreneur sold a share of the firm to one of the firm’s bookkeepers, and so the business could continue. The firm survived but it faced smaller credit losses also later.

The main factors causing the crisis can be summarized as follows:

• big credit losses due to the bankruptcies of the biggest customers after the devaluations

• unfavourable customer structure (the business was based largely on a few big customers)

• a significant loss of customers and fall in turnover because the bookkeeper in charge left the firm taking a lot of clients with her

• stiff competition and decreasing turnover and profitability in the field due to the general economic recession and its consequences (new competitors)

• low profitability due to weak financial follow-up

The main factors affecting the recovery can be summarized as follows:

• selling a significant share of the firm to one bookkeeper

• the business itself was on a sustainable basis

• acquiring new customers

Case S2C: failed

The situation before failure. The firm was a bookkeeping agency offering bookkeeping and auditing services, payroll computation, invoicing, and consulting. The main customer groups were new local firms, firms in the woodworking industry, timber harvesting firms, and small metal workshops. The most important cooperation partners were the Union of Bookkeeping Agencies, a software firm, and the local Chamber of Commerce. The firm’s main strengths were first-class versatile know-how, especially in taxation, keeping to deadlines, and a good reputation. Customers appreciated these qualities, and though new competitors came into the field every year, the increasing competition had no effects on the firm. As a matter of fact, the firm had no need for marketing. The firm’s major weakness might be bad customer service: not all clients liked the straightforward way in which things were presented. The firm was especially dependent on economic trends in the forest and wood industry because it was the dominating industry sector in the firm’s clientele over the years.

Life cycle. The firm was founded in the late 1970s by one woman aiming to employ herself. Four years later, her husband came into the firm though he had a permanent post in the public sector. He had left his job in the public sector believing that his life would be more interesting in the private sector. He had technical and commercial qualifications and long work experience but, however, not in the field of accounting.

After the firm had been operating for ten years, they divorced and the husband bought his wife’s share of the firm at the end of the 1980s, and was sole owner ever since.

The firm had followed technological development in the field. The first big change in the firm’s history happened in the mid-1980s when new technology was bought and more personnel hired. Automatization had led to cost savings and the firm could provide some services without charge, which was not the case with most competitors.

At the beginning, one customer firm had constituted almost one third of the firm’s turnover. This had been recognized as a severe threat, and it was decided to minimize it by means of firm growth. Later, when the owners of this client firm, which was the firm’s biggest customer, sold their firm, and consequently the bookkeeping contract was dissolved, the loss of this customer had been manageable due to new customers which the firm had succeeded in acquiring.

Later, it had been decided that the firm’s aim was to be number one in the area. Opportunities for growth had seemed to be good because there were more customers than the firm could serve. However, a problem arose with the premises:

there were not enough rooms for more people. In the late 1980s, the firm had to choose whether the number of personnel and customers should be adjusted to the rooms available, or whether the firm should find larger premises. The decision to invest in a new office building was made, and a big loan in foreign currency was taken. At the same time, the firm leased a new computer system.

However, due to two devaluations at the beginning of the 1990s, the amount of the loans grew rapidly by about 50%. The firm faced liquidity problems, and consequently suffered from significant financial costs as the interest on overdue payments was 16%. The economic recession seriously affected the Finnish forest and wood industry, which was the firm’s main customer segment. Many customers faced serious problems because of rapidly decreasing sales and many big customers failed.

As a consequence, the firm had also suffered big credit losses, and more problems caused rapidly decreasing incomes generated by the surviving customers and their problems in paying. At the same time, the firm’s debts were bigger than ever before, and all securities were used. Moreover, the values of the securities collapsed rapidly. The firm had tried for half a year to sell the brand new office building but no one was interested in buying it. Also, the number of personnel was reduced. The firm proposed postponement of interest payments to the bank, but the request was rejected.

Finally, all key persons left the firm, and it did not have enough income even for the interest payments. Since the firm had no working capital, it filed for bankruptcy.

The mai n factors affecting the firm’s failure can be summarized as follows:

• strong dependency on firms in industry sectors highly sensitive to fluctuations in the general economic development

• a supposition that economic growth would continue as before

• big credit losses due to the bankruptcies of many customer firms

• no more securities available and the collapse of their value

• a jump in the amount of a big loan in foreign currency due to devaluations (a loan for an investment in a new office building)

• no buyers of the new office building

• insufficient income for necessary payments

• the bank’s rejection of the request for postponement of interest payments

A comparison of the three stable independent survivors in the field of bookkeeping agencies

At the time of founding, all firms were new, founded to provide the entrepreneur with at livelihood. Excluding the last entrepreneur in the failed firm, all entrepreneurs had professional education and work experience in similar tasks. All firms were full service bookkeeping agencies and followed technical developments. The customers of the successful firms were fragmented, whereas those of the failed firm were from one highly dominating customer segment, i.e. SMEs in the forestry and woodworking industry. The threatened and the failed firm suffered from an unfavourable customer structure, i.e. they had a few big customers, which caused a high customer risk.

Successful firms were more network-oriented than the failed one.

All firms invested in new technology, e.g. in computers and software. The threatened and the failed firm suffered from credit losses. The failed firm invested in an office building. It had strong growth aspirations and aimed at becoming number one in its location. The successful firms showed weak but stable growth. Also, they had a more analytic and systematic approach to their businesses, and growth was based on the small steps strategy. The environment of successful firms was more stable, due to their fragmented customers. Also, stochastic factors seem to have some role for success, e.g. in the case of the successful SME where the entrepreneur had met his partners by accident. A detailed comparison of the cases is presented in Appendix 8.

8.2.3 A comparison of failed and successful stable independent